SHEILD: Want to ‘take ground’ but feeling unsure?

 

Invest with confidence, knowing the following 5 areas of personal finance are sorted.

 

S – Savings (Emergency Fund):

  • How much you need in your emergency fund is determined by the likelihood of you suffering a financial loss, the value of this loss, and the time it takes to recover: Normally, I’d recommend 3-6 months’ worth of your living expenses be retained for an emergency fund.
  • Where to store it? Ideally by using an account that’s not easily accessible, you’ll increase the odds it will still be there when you need it. The two biggest mistakes people make with emergency funds is that they tap into it frequently, or refuse to use it. If you can be trusted and if you want a return on your fund, consider a revolving line of credit or offset to store it in.
  • What’s an emergency fund used for? Unexpected emergencies or risks where it’s more affordable to self-insure

H – Hedging:

  • What is ‘hedging’? It’s any strategy you can deploy to protect something valuable.
  • Investing: Often a ‘hedge’ would be something that increases in value when something else decreases in value. It’s a way to make sure that short-term prices changes don’t lead to financial harm.
  • Insurance: Personal insurances like medical, income protection, and life insurance are ‘hedges’ that can provide cash injections when something bad happens – this can offset financial loss.
  • Cognitive dissonance: By thinking about more than one idea or understanding more than one perspective without becoming attached to it, you’re more likely to be prepared no matter what the future brings.

I – Income and Expenses (Numbers):

  • Know your numbers: If you can see your financial situation, you’re more likely to be able to control it.
  • Understand the amount of income coming into your household, the amount that’s spent, and where it goes.
  • Review your budget regularly – more visibility can increase your ability to control your money, without much effort.
  • After your life-goals have been set, review your numbers to ensure you have a plan to make them fall in line with your destination.

E – Eliminate Debt (Debt-Strategy):

  • Good and bad debt: Good debt is any debt used to acquire things that grow in value at a rate which is higher than your financing costs. Bad debt is any debt used to acquire things that decrease in value. Good debt is a tool to get what you want, whereas bad debt is a noose around your neck.
  • How to use it: Wisely. Consider the reasons why it’s a good idea to use a mortgage. Is it a tool to build wealth, or something that helps improve your lifestyle?
  • How to eliminate bad debt: The snowball method is a debt-reduction strategy where you pay off debts in order of smallest to largest balance, regardless of interest rates.
  • How to eliminate good debt: Mortgages on property (especially rental properties) are best paid off later on in your life when you’re income is [relatively] higher and it’s more appropriate to take less risk. Downgrading your home or disposing of rental properties are a great ‘last-mile’ strategy to eliminate your mortgage. Don’t forget the opportunity cost of not investing outside of your own home sooner!

L – Life Goals (Goals):

  • Set goals: You won’t achieve it, if you can’t see You’ll hit what you aim at, so aim at something good.
  • Define short, medium, and long-term lifestyle and financial objectives.
  • Understand the trade-offs between the things you want today, and need for tomorrow.
  • Remember that goals aren’t enough on their own. Align goals to your purpose, but using a financial strategy.

D – Determine Your Investment Strategy:

  • Pay down your mortgage, then invest: This sequential strategy has pro’s and con’s depending on the interest rate cycle and rate of performance in non-property markets.
  • Invest and ‘service’ your mortgage: By investing simultaneously, you’re getting money at work in the market, where it’s possible to gain a return in excess of the saved interest on your home loan. Most higher risk investments take longer to achieve a strong result, so the best time to start accumulating them, is right now.
  • Portfolio approach: Divide up your income, and your investments, according to a template. Do this when you start, or move towards this over time through the act of ‘re-balancing’.
  • Always review performance, fees, strategy, and advice: Regularly review and adjust as needed, being careful to take a long-term view on wealth creation.

 

The SHIELD approach to building wealth ensures that while you’re building for tomorrow, you’re protecting today as much as possible.

 

Personal finance is one of the most essential foundations you can build before, or while you’re building wealth.

 

Enrol in ‘New Wealth Foundations’, and build a stronger awareness of the personal finance principles useful for carrying higher levels of wealth for the world you’re tracking towards. You can sign up to the course here: https://ungaro.co.nz/build-your-wealth-foundations-course2/