Protection Review

 

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We mentioned earlier the three basics of financial planning: emergency cash reserve, basic protection, and some kind of pension. Below is a list of items to consider when reviewing if you have adequate protection in place:

  • Do you have an emergency cash reserve to cover at least 3-6 months expenses?
  • Do you have adequate health insurance?
  • Do you have any income protection insurance, in case you are sick or injured for the long term?
  • Do you have any critical illness insurance, in case you are diagnosed with a serious illness? (heart disease, stroke, cancer etc.)
  • Do you have any loans / liabilities that are not insured?
  • Do you have children? If so, have you considered life insurance?
  • Do you have a current will? Does it include all of your worldwide assets?
  • Have you reviewed your estate planning needs?

Obviously getting all of this done in one go is going to be tricky, so I would suggest making sure you have at least the first three in place before you consider making investments. The rest you can work on as you go.

Inspiration and information

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If you are serious about attaining financial freedom and peace of mind, I encourage you to read and study as much as possible. Below are some recommendations; some classic, some ultra-modern, to help you get started. Feel free to share any good books you have read on the subject:

Think and Grow Rich: The Original, an Official Publication of The Napoleon Hill Foundation

– A classic on personal development and personal improvement. I would encourage just about everyone to read this book.

Rich Dad Poor Dad: What The Rich Teach Their Kids About Money That the Poor and Middle Class Do Not!

– Another long seller. Learn the difference between working for money and having your money work for you.

Rich Dad's Cashflow Quadrant: Rich Dad's Guide to Financial Freedom

– Not as well known as Rich Dad Poor Dad, however I think it’s a better book. It certainly changed my outlook on working for income vs owning and investing in businesses.

Unshakeable: Your Financial Freedom Playbook

– Brand new and right up to date. Tony Robbins teaches how to invest safely in this modern, unpredictable era. With insights from some of the world’s top investors and business minds. At 256 pages, this is pretty much bite-size by Tony Robbins standards.

MONEY Master the Game: 7 Simple Steps to Financial Freedom

– And here’s the long version. At 688 pages there isn’t much that has been left out of this one…

 

My Financial Profile – Asset Weighting

 

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Welcome back! So far you have completed your Income and Expenditure and Balance Sheet. Now it’s time for the last part, Asset Weighting.

Take a look at the last tab of My Financial Profile. It’s not as confusing as it may look. The percentages in the left-hand column are simply a guide. This is what I would recommend as a good balance between fixed, medium term and current assets.

You will see that the recommendation is for 10-20% in net fixed assets. For most people, this is held in their own home, and it’s not possible to sell half a house if you suddenly need some liquidity. If you have expertise in property and want to hold more than 20% in net fixed assets, particularly if it’s generating you a nice income, that’s perfectly fine. The 10-20% is just a guide.

I have also indicated 10-20% as the recommended weighting to current assets. What we are really talking about here is your Emergency Cash Reserve. (see here if you need a reminder what this is) We are currently in a low-interest rate environment, and I don’t see great benefit in holding lots of cash, particularly if you live in Japan, where interest on bank deposits is near zero. One reason you may hold a larger weighting of cash is if you are saving for a deposit on a home. This money is really just waiting to be moved to the net fixed assets part of your balance sheet.

This leaves 60-80% in medium term assets, which is anything you are saving and investing for your future. It’s quite rare that I meet people who already have this weighting in medium term assets. If you are just getting started then it may in fact be very low. Even people on high incomes are often highly concentrated in cash and their own home.

So now it’s time to input the numbers from your balance sheet. Under Asset Weighting, Amount, in the third column, enter the totals from your balance sheet for Net Fixed, Medium-term and current assets. Circle whether you already have your Emergency Cash Reserve covered. (Y/N)

Now you can total your Net Worth. Hopefully you like the number you see here, but remember it’s a work in progress.

Now it’s simple to work out your current weightings as a percentage in column four. If you have $200,000 in fixed assets and your total net worth is $1,000,000, then your fixed asset weighting is 20%. (200,000 ÷ 1,000,000 x 100)

So how does your asset weighting look? Is it close to the guide in the left hand column? Are you heavily overweight in a particular area? If so, then the Target Weighting in column five is your action plan. Here you can input the way you want it to look.

For example if your current weighting looks like this:

  • Fixed assets – 10%
  • Medium-term – 10%
  • Current – 80%

Then perhaps you need to adjust your target weighting to:

  • Fixed assets – 10%
  • Medium-term – 70%
  • Current – 20%

This means you need to invest some money! There are two ways to do this: obviously you can take money from your current assets and invest it to balance things out. You can also take money from your monthly surplus over expenditure and invest that every month.

The lower box will help you to determine where your current disposable cash flow goes each month. In the left-hand box, insert your monthly / annual net disposable income. This is the last number on the income and expenditure page. Now you can examine where this money actually goes every month. Is part of it making extra payments on your mortgage? In that case it’s going into net fixed assets. Does it just go into your bank account and sit there? That would explain how you got to be overweight in cash!

It’s surprising how many people I meet where their disposable income flows 100% into current assets. I would encourage these people to consider investing on a monthly basis – the column for Future Amount is where they can decide how much to contribute each month.

As a general guide, the maximum amount I think you should contribute to medium term assets from your monthly surplus is 50%. Simply put, if you are saving $2,000 a month, and it’s all going into cash, then you can consider investing up to $1,000 per month into medium term assets. Any more than that and you may run into trouble if suddenly hit with an unexpected expense, or drop in disposable income.

Hopefully this is all clear and you have completed your asset weighting and understood what changes you need to make. Please let me know if you get stuck!

 

 

 

My Financial Profile – Balance Sheet

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The next step in building your financial profile is to complete your personal balance sheet. This consists of a combination of fixed assets, medium term assets, and current assets. You can find it on My Financial Profile.

Let’s start with the first tab for fixed assets. What we mean here is usually property, although anything that is illiquid (difficult to sell in a hurry) is classed as a fixed asset. This could include investments in unlisted companies, otherwise known as private equity.

If you own your own home and live in it, then record the details under principal residence. If you aren’t able to fill in every box that’s ok, but you really need to come up with a current value. If you haven’t had your home valued recently then this may not be so easy. You may find you need to estimate based on what similar homes in your area have sold for. If you have bought your own place recently, or simply cannot come up with an estimated value, then use the purchase price as today’s value.

If you are lucky enough to own a property / properties that you rent out, then record these under investment properties. Remember that the rental income you receive should also be recorded on your income and expenditure sheet.

You will note that the form asks for a value in base currency. Please refer to the post here to find out what your base currency should be.

Ok let’s move on to medium term assets. These are generally investments for your future and may differ in holding time. The first part is for retirement schemes. If you are paying into the Japan national pension, it may not be so easy to get a current balance, but it is possible. Your company HR department can likely assist, or you can go to your local pension office and request one. You probably actually get a statement by post from time to time, but you may not pay attention to it. If you are really stuck then estimate based on what you contribute each month and how long you have been paying in.

There’s some useful information on the Japan National Pension System here.

If you have a company retirement scheme, or a personal one, make sure you record those here too. If you have worked in other countries, it’s possible you have pension assets in those countries. Make sure you are not forgetting anything. Request a statement and get a balance.

The next part is for non-pension regular investment. Do you pay into a monthly savings / investment plan where you are building up savings for the future? If so include them here. (if you are just saving in the bank, that goes under current assets)

The other assets box is just that – if it’s not cash, property, or a regular contribution scheme, it goes under other assets. This could include stocks, stock options, bonds, lump sum investments into mutual funds etc. If you’re not sure where to put something, put it here and remember to get a balance.

Lastly we have current assets. This is basically cash in the bank, or at home. If you have multiple accounts then this is a good time to figure out how much is in each of them and consolidate it into a final balance. I would include term deposits with the bank here too. Some people put anything with more than a one year maturity in medium term assets, which is fine, but cash deposits are generally easily broken if you need to access the money, so I put them in current assets.

Hopefully your balance sheet is taking shape and you have a total for fixed, medium term and current assets. You will need this when we do your asset weighting. Before that though, just go back through each section of the balance sheet and ask yourself if there’s anything else you have forgotten to include on here. Is there an old post office account that you opened years ago lurking somewhere?

Once you’ve done a final check, that concludes your balance sheet!

My Financial Profile – Income and Expenditure

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If you meet with a financial adviser, the first thing they will do is take you through a fact-finding process to understand your current financial position. This financial profile then forms the basis for advice.

Today you can begin work on your own financial profile, starting with income and expenditure. It’s up to you how you record this. You can simply write it on a piece of paper, make your own spreadsheet, or use the handy Financial Profile I have created here: My Financial Profile

Some of you may already know exactly what your monthly income and outgoings are. Maybe you are recording them already, in which case, well done! Some people may have a general idea but have never actually looked at the numbers in detail. And then there are the “I don’t know where it all goes” people – this is for you guys especially!

Start by opening the first tab of the Financial Profile – Income and Expenditure. If it’s your first time doing this you may prefer to record the figures on a monthly rather than an annual basis. The top part is for income.  If you have a regular job and tax / insurance / pension contributions are deducted at source, you may find it easier to simply record your net earned income – the amount that actually gets paid into your account every month. If you are self employed and/or have income from multiple sources you may find it easier to record your gross income. If your income fluctuates you may want to look back over the last three years and work out an average number.

If you have income from sources other than work, such as rental or investment income, then record those too and total it all up. If you have a partner who also has income, record that too.

Now for the fun part! Figuring out all the things you spend money on every month. Some organised people might be keeping receipts and records already. If you belong in the “I don’t know where it all goes” group, you may actually need to spend a couple of months gathering receipts and keeping track of your spending. A friend of mine recommended the Spending Tracker App. However you do it, try to record everything you spend over the course of an average month. If you have to estimate some items, that’s fine.

What we are really looking for is a number in the box at the bottom, indicating your monthly surplus over expenditure, or disposable income. Simply put, it’s the money that’s left over at the end of the month. Knowing this number helps us understand later how much of our savings we should be allocating to longer term investments each month. Total income minus total expenditure gives you your disposable income.

If you find that you have more month left over at the end of the money, then the first thing you need to do is look for things that you can cut from your expenditure list. Remember the goal here is to spend less than you earn so you have money left over to save for the future.

So hopefully you have been able to work out your monthly surplus over expenditure. Let me know if you have any trouble with this.

What is your base currency?

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Soon we will get started with your financial profile, where you will be recording your income and expenditure and building your own personal balance sheet. In order to boil this down to the most important numbers you will need to decide which currency to calculate in.

For expats this can be a tricky business. You may live and work in Japan for example, and earn money in JPY. However you may have assets, or even income, in your home country or elsewhere in other currencies. How do you decide which is your base currency?

For completing your balance sheet and adding up your total assets we could argue that it doesn’t really matter. Just pick the currency you use the most and convert all values to that. However from a financial planning perspective there is a clear rule: Your base currency is the currency you are going to spend the money in. If you are just going to live in Japan for a few years and then move back to your home country permanently, then the fact that you earn in yen is largely irrelevant. You will need to plan in the currency of your home country as that’s where you will spend the money. This is important to help manage currency risk. It would be a shame to build up a tidy sum in assets in JPY, only to find when you move back home and need to start using the money, that the yen has crashed and you are getting a really bad deal on the exchange rate.

If you are going to stay in Japan forever and retire here it’s pretty simple. Your base currency is JPY. However, what if you plan to send your child to university in the UK and need to save for that? Yes, it’s actually possible to have multiple base currencies. In this case you would save for retirement in JPY and save to pay for your child’s education fees in GBP.

So before you start your financial profile, it’s important to work out your base currency. When you fill out your balance sheet use the currency that you are likely to spend most of the money in. Feel free to contact me if you are unsure.

A Simple Formula

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When it comes to taking complex strategies and tools and making them so simple, that anyone can apply them immediately to improve their quality of life, Tony Robbins is a master. Here is his simple formula for creating financial abundance:

  1. Spend less than you earn and invest the difference.
  2. Re-invest your returns for compounded growth.
  3. Reach a critical mass of investment capital that creates the annual income you desire for life.

If you are not sure what is meant by compounded growth, take a look at the charts in this article. (the article is a few years old but the charts tell the story well enough)

In the coming posts we will get started with your personal financial profile. The first item on there is income and expenditure, and hopefully you will find that you are already spending less than you earn!

Have you covered the basics?

 

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If I had to come up with three basic financial planning points that everyone should be taking action on, they would be as follows: emergency cash reserve, basic insurance, and some kind of pension. Without getting into too much detail, here are basic definitions:

  • Emergency cash reserve: this is money in the bank, not invested, and easily accessible. If you lost your job tomorrow, how long would you be able to survive before finding a new one? Typical advice is to have 3-6 months of expenses covered before you start thinking about investing. If you have a very secure job you might be comfortable with less. If you are self employed, or have a fluctuating income, you may need a bit more cash to feel comfortable.
  • Basic insurance: if you get sick is it going to cost you? If you work for a company in Japan, for example, you are likely to be covered by the Japan national health insurance. However what if you are long term sick? How long will your company continue paying you? Income protection insurance is designed to pay you a portion of your current income if you are sick and unable to work for the long term. It will often cover you up to age 65 for a relatively small monthly cost.
  • Pension: I deliberately referred to “some kind of pension” above. We are not going to get into details now of the options available. (we will later for sure) The question now is: are you currently putting aside even a small amount of money every month for when you are older and no longer inclined / able to work?

You may be surprised to hear that all three of these come under the umbrella of protection. A cash reserve protects you from having to dip into investments or borrow money in a crisis. Insurance protects you from events that can derail your ability to generate income. And a pension protects you from being poor in old age. How are you doing on these three basics so far?

Where are you at financially today?

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Over the coming days we will be discussing how to build up an accurate picture of your current financial position by looking at your income and expenditure, balance sheet and asset weighting. Before that though, let’s start with a few general questions you can ask yourself to get a sense of where you are today and how you feel about it. Try to answer on a scale of 1 to 5 with 1 being terrible and 5 being outstanding:

  1. How would you rate your current income?
  2. How would you rate your net worth?
  3. If you have any, how do you feel about your current investments?
  4. How would you rate your current cost of living?
  5. How would you rate your level of monthly saving?

How did you score out of 25? Anything over 20 and you’re in a pretty good place. 15-20 indicates relative comfort, but with room for improvement. Less than 10 and you might need some cheering up! Regardless of your score, did you learn something from answering these questions? What areas do you need to focus on to improve your current position?

How do you feel about money?

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Whether you believe “money is the root of all evil” or “money makes the world go round”, your psychology with regard to money will impact upon your decision making.

Why not take a moment to review the questions below and see how you really feel about money and your finances:

  1. How do you feel you are doing financially right now?
  2. What are some positive / negative emotions you have about money?
  3. What is your greatest fear about money and finances?
  4. How much do you think you are capable of earning annually? Are you earning that much now?
  5. How are the people around you doing financially?
  6. What is an absolute must for you right now financially?
  7. What is your ultimate financial dream?
  8. What is your current level of financial pressure?
  9. What is your risk tolerance for investments? Conservative, moderate or aggressive?
  10. What is your overall rating for your financial psychology on a scale of 1-5?

Our beliefs about money can either support us or deter us from successful financial planning. If you are thinking “This is too hard” or “I don’t have time for this”, then perhaps you need to work on developing some more empowering beliefs to help you along the way. If you are thinking “I’ve got this” or “I’m ready to take control of my finances” then you are good to go!