Forget fitness – focus on finance
With the start of a New Year, many people make a series of resolutions that are inevitably broken almost as soon as they’re made. This year, why not bypass the clichéd commitments to exercise more and drink less and instead focus your attention on getting your finances in order?
Approaching your finances can be intimidating but it only takes a few sensible steps to get onto the right path. Here are some useful tips.
Superannuation is one of the most effective ways to save for your retirement. Contributions (up to a set limit) can be made from pre-tax dollars, which can be very attractive if your tax rate is higher than the rate at which your super contributions are taxed. The tax on super contributions is 15%, which means you don’t need to be a high income earner to benefit (although the benefits are greater for those on higher marginal tax rates).
Contributions to super that can be made from pre-tax dollars are limited to $25,000 per year (the contributions made by your employer on your behalf are included in this limit). This is important for two reasons:
Beyond that limit, contributions are made on an after-tax basis.
You can no longer tax-effectively contribute large sums in the lead-up to retirement – it’s important to spread your contributions over many years to maximise the tax benefit.
Speak to a qualified financial planner for advice on the most effective techniques for maximising your superannuation savings.
If you already invested, now is a good time to have a look at your asset allocation – how your investments are divided among various asset classes such as equities, fixed income and cash. There is considerable research to suggest that getting asset allocation right is one of the biggest drivers of investment return.
The right asset allocation for you will depend on your objectives, your life-stage and your attitude to risk. Younger people and people with a higher tolerance for risk will generally consider allocating more of their money to risker assets such as equities. Someone closer to retirement or likely to need to access their money sooner (perhaps to make a major purchase such as a home) should be weighted more heavily to less volatile assets such as fixed income and cash.
Given the complexity of asset allocation and the importance of getting it right, we recommend taking advantage of professional advice. Morgan Stanley’s research team includes an asset allocation strategist who focuses on aggregating data from across the globe in order to make appropriate recommendations.
The start of the year is a time of positivity and joy. It seems counterintuitive to be thinking about worst case scenarios at such a time but it’s all about planning ahead. The ideal time to lock down things like insurance and estate planning is when you’re fit and healthy and confident that you’ll never need them.
If you don’t already have life insurance and income protection in place, make this the year you do. If you already have insurance in place, well done! Maybe just take a few minutes to check your coverage is still sufficient and you’ve nominated the right people as beneficiaries.
Likewise, if you’ve been putting off setting up a will and a power of attorney, don’t delay any longer. And if you do have an estate plan in place, take the time to review it and make sure it still aligns to your personal circumstances.
Having appropriate insurance and estate plans in place can make life significantly easier for you and your loved ones when unfortunate circumstances arise. The peace of mind they provide is well worth the effort involved.
If you have aging parents, consider having a conversation with them about their estate planning to ensure their wishes are known and well-documented.
Don’t forget to create a plan for your digital assets as well. Can your family members find your usernames, passwords and other necessary information to access your online accounts if needed?
Whether it’s super, asset allocation or insurance, your planner can help. An experienced professional can make seemingly overwhelming tasks much easier and can help you break them down into clear, actionable steps.
For more on how to get your finances in order, speak to your Morgan Stanley financial adviser or planner. Plus, more Ideas from Morgan Stanley’s thought leaders.