Dealing With Uncertainty

Episode 57

Podcast – Dealing With Uncertainty

In this episode Pete and Zac discuss financial strategies in helping you deal with uncertainty.

 

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Transcript:

Pete:

Okay, we’re back after a quick break. Wet the whistle a little bit. So now, resilience, flexibility, dealing with uncertainty is part of your financial plan. I think this is a core, it’s a foundation piece of any financial, plan to make sure you can cope with the curve balls, the shit storms that life naturally throws at you. And we’ve all had them. And they can be medical. They can be children, family, work. You know and at the moment it’s-

 

Zac:

Somebody’s car broken down or something like that.

 

Pete:

Yeah, I saw someone literally walking into the office today, someone’s car’s has been broken into and the cops are all outside. So it was absolute shemozzle out there. So yeah, all these sort of things. So I think, how do we get started? I think you sort of… Do want to kick us off with… I think you just need this as part of every financial plan. I’ve had a peek at your notes, so…

 

Zac:

Obviously. Looking over the shoulder.

 

Pete:

I agree.

 

Zac:

So the first tip, and probably what I think is the most important one, is having a cash buffer, an appropriate cash buffer too. So that amount might be different for everyone. But is there a rule of thumb that you normally look at in terms of expenses, amount of monthly expenses?

 

Pete:

I think you have, six months I think is a really good buffer. Because you think about if you’ve lost your job or something significant happens, if you’ve covered six months worth of your living expenses and don’t just put your core living expenses, your lifestyle expenses as well, that should give you enough breathing space to at least sort of make some decisions. And what you’re trying to do is, it’s not trying to solve all the problems, but it’s trying to give you breathing space.

 

Pete:

So I think best practice is minimum six months and perhaps, if you can, six to 12 months. And in terms of where do you put that? I guess the place you wouldn’t put it, is into growth assets or into your super fund, unless you’ve satisfied all the conditions of release. You want to make sure you can get access to it. So where would you be sort of squirreling these funds… or where are your funds?

 

Zac:

Would be sitting in a cash account, most likely or a high interest savings accounts. Maybe a term deposit.

 

Pete:

Term deposit? Jeez, you’d be very…

 

Zac:

And you might need to break it, but-

 

Pete:

Yeah, you might want to do it. You could do a 30 day notice saver or something like that. But otherwise like an offset account, for most people, would be the most logical place, if you’ve got a mortgage.

 

Zac:

If you’ve got a mortgage offset account.

 

Pete:

But otherwise you want to get as much interest as you can, but you want it to be a call. So you want it to be secure. And the main point of it is, don’t get too upset. It’s going to look frustrating to go, “I’ve got a chunk of money doing or earning nothing.” But it does serve a very valuable purpose. Because it should give you peace of mind that you can sleep easy knowing that whatever gets thrown at you, you should be able to absorb it and make sure that you’re sort of… you know, you’ve got time to make decisions about how to deal with other assets.

 

Zac:

Yeah, exactly. And it’s important too that, having the cash buffer then allows you to mean that you’re not, as you said, forced to sell other assets and we never want to be forced to sell. Because things might go wrong in a bad time in the market. And then if you don’t have your cash buffer sitting there, then you’re going to potentially have to sell an asset at a time that it’s not desirable. And yeah, that has further implications for your overall financial plan.

 

Pete:

Yeah, understood. And then the other thing is, if you do draw on your cash buffer or your cash reserve, make sure you top it back up. So don’t sort of fall into the trap of going, “Oh great, I’ve, I’ve used my cash buffer. Nothing ever bad will happen again.”

 

Pete:

Well from experience, life continues to throw challenges at you and curve balls. So make sure you’re constantly getting that back up to that level as well. And that might be selling down assets or doing different things.

 

Zac:

Cool. Definitely. So what’s your next tip Pete?

 

Pete:

I think, what I like is I think you need to have a really rock solid and clear vision and sort of goals into the future about sort of where your life and sort of where trying to get to.

 

Pete:

And the reason why this is so important and is a really strong part of that foundation of a good financial planning strategy, is when something does happen and you need to potentially access your cash reserve or you need to veer off the straight path that you had set for yourself, you can find your way back more easily and get yourself back on track, because you’ve got something to measure against and go, “Hey, okay I was expecting that I’d have this much in assets, this much in savings, this much in super. My loan would be down to this. Hey look, something happened. I lost earnings capacity or I needed to redo parts of the house or I needed to pay for X bill. Okay, I’m behind track.”

 

Pete:

So unless you’re measuring it, unless you’ve got goals and you’ve sort of mapped it out, you have no idea how far off you are. So it’s harder to get back on track. So I think the clearer you can map out your future and especially the end game, and I think that’s the most important-

 

Zac:

Well that’s the most important part. Because you’ve figured out what the end game is, and then you work back from there and going, “Where do I need to be at each stage.”

 

Pete:

Yeah. And I think that’s the thing. Like the longer you’ve been, I guess running a financial plan or sort of monitoring your financial strategy and your progress, you know that it’s not linear. It’s not like the same every… It’s not, “Oh yeah, rinse repeat, every year the same thing.” Returns are different. Returns can be negative. Earnings are not always the same. You know, pay rises are not always the same. Expenses aren’t always the same.

 

Pete:

So all those sorts of things, and sometimes these can be really good things and positive things like you might have like, oh I had a just a swag of people getting married and then having babies. So you’re going, “Oh, there’s more gifts, there’s more parties,” there’s new suits that you need, and all those sorts of things that go along with these events. Or they’ve got them overseas and you’re paying for travel costs as well. So it doesn’t necessarily need to all be bad things you need to plan for, but that robust vision, very, very good as a good foundation to build off.

 

Zac:

Definitely.

 

Pete:

What else you got up your sleeve there?

 

Zac:

So the other one in terms of dealing with uncertainty would be to make sure you’ve got a good insurance plan in place. So insurances are often there to look after you in uncertain times. And that’s the whole reason. The best insurance is the one that he never going to have to claim on. But insurance is like in the ones that we normally talk about, a life insurance, total and permanent disablement trauma and income protection. Because they’re all going to work in tandem with each other to make sure that if something does go wrong medically for you or something even worse if you or your partner was to pass away or something like that, that financially you’re not going to be impacted upon.

 

Pete:

Yeah, absolutely. And I think it’s good. And you need to make it work for you. So you don’t want to have it being shored up to the eyeballs, but you want to have the appropriate amount of cover because it’s your plan B to fall back on. And it’s not there to make you in a better financial position. It’s literally just there to keep you going, and definitely not there to make you in a better financial position. That’s called moral hazard, Zac. That’s when people go on honeymoons and one of them doesn’t come back potentially because they’re insured for too much and it’s too appealing. But yeah, the financial outcome. So, thank goodness I survive that. So… Yeah, so I think that’s definitely like insurance is really, really fundamental part of any robust financial plan.

 

Zac:

Well, especially with the income protection, like if you think about for most people at the moment, most listeners, I’m sure your lifestyle and how you fund your lifestyle is based solely upon your ability to generate an income. So unless you’re in the retirement phase of life, but for most people it’s going to be that your ability to generate an income is how you live and fund your daily expenses. As soon as that goes away due to illness or injury where you can no longer work and your sick leave starts to stop and different things like that, then it’s pretty much only Centrelink that’s going to be potentially coming in for you at that stage. And then depending on what your lifestyle looks like now, that might not necessarily be enough. So it’s important to have income protection there.

 

Pete:

It’s definitely not enough to cover my lifestyle at the moment. So-

 

Zac:

Yeah, exactly. Especially with two kids under two.

 

Pete:

Oh, it’s horrible. The thought just is to go, “Hey, if that’s my plan B, the amount of things I would need to forego and sort of changes and sort of the way we run our day to day life, would be horrific.

 

Zac:

Yeah, because I mean for a lot of people, mortgage repayments are no longer been able to be met. Different things like that. So having income protection in place, is really important. And having appropriate income protection to your salary.

 

Pete:

Yep. Absolutely. All right, so another one that I’d like to sort of cover off on today is spending less than what you earn. I think that, you just need to be disciplined before these things happen. So it’s too late to plan for uncertainty when you’re already going in that period. So I think you need to get on the front foot and have really good financial habits now.

 

Pete:

So yeah. The sooner you can start these things, the better. And the main problem that most people have in… that holds them back from accumulating wealth, retiring early and building financial independence, is people spend beyond their means. And they keep increasing their expenses and their lifestyle every time their incoming increases.

 

Pete:

So I think sort of prescribing that, the percentage formula of going always putting a certain amount of your money away-

 

Zac:

That’s the most basic rule for generating wealth isn’t it?

 

Pete:

Yeah.

 

Zac:

Spend less than what you earn.

 

Pete:

But it sounds really simple. And I definitely do that now. But as a younger lad I was definitely not doing that. And it can get out of control really quickly cause then okay, you’ve can fall into problems with debt and then the debt compounds at a rate over and over again. So then it sort of starts to get away from you and it can become actually quite taxing mentally on you as well. So there’s a lot of financial stress. Continues to build and build and build. So I think if you can do that and make sure, with that surplus money that you’ve got and that you’re redirecting, I think definitely put some of it into that cash reserve you were talking about, but get some of it going into growth assets. Because I think the quicker you can build a pool of growth assets, investment assets outside of your family home and the family home’s an important one, the better you’re going to be. And the more resilient you’re going to be able to be in the future because you’re going to have assets to fall back on.

 

Pete:

And then in the future you can actually have passive income. So that stuff that’s not reliant on you. So that’s going to be less susceptible to a lot of loss challenges to do with employment problems and health issues as well. Because that’s what we’re trying to work towards to create. Because it will help you in achieving financial independence sooner.

 

Pete:

So I think if you can apply a formula, and for some people that would be a dollar formula. I like percentages because you can sort of stick with them for the long term. And you should be aiming to be putting away 30 to 40% into your future you. And that might be at the start, it might be debt repayments on your home mortgage and getting that down or paying it into an offset account. Some of it into a cash reserve, and definitely some of it into some growth assets.

 

Pete:

So whether it be shares, property, sort of investment assets that have capital growth and the ability to produce a passive income in the future, is really important to sort of setting you up really, really strong financially.

 

Zac:

Yeah, especially with the way that interest rates are at the moment. Putting something somewhere where it has the ability to generate something over 2% or one and a half percent, it becomes very important. Because otherwise you’re really just keeping up with inflation or in in most cases, you’re below it.

 

Pete:

And you’ve got to be planning for the long term as well. A financial plan is not a one-time transaction or a sort of a 12-month thing, it’s for the rest of your life. And you know, depending on how old you are, the listeners out there, you know, it’s decades and decades and decades or perhaps really… depending on, you know, might have people that are shorter than that, but it’s still a longterm plan. So you need longterm thinking as part of it. So definitely making sure you set that formula. So whether it’s 15% into, you know, short term sort of cash debt repayment and 15% into growth assets. And I still think you should do a bit of both, because it gets you good financial habits. You’ve got anything else up in your kit bag there?

 

Zac:

Yeah. So following on the part of talking about growth assets and things like that, I’d be making sure you have diversification in your portfolio. So this will help you and times of uncertainty, especially in the markets. We see a few people come in every now and then, they might have a portfolio that’s just maybe 10 ASX top 200 stocks or something like that where they’re highly, highly for banks. You know, Coles, Woolworths, BHP and Rio, highly diversified.

 

Zac:

Yeah. But if something was to go wrong locally, then then they’re highly susceptible to potentially losses on those types of accounts. Whereas if you have a portfolio that’s got a mix of Australian and international equities and property exposure, some fixed interests and different things like that, then you’re more likely to be able to not get hurt as much when things do go wrong and in those uncertain times.

 

Pete:

Yeah, I think we’ve covered most of it. I think probably the one, and I’m thinking more in terms of investment market uncertainty here, is just know what you’re comfortable with. And also know what you don’t know. And I think what I’m, what I’m talking about here is understand what your tolerance for risk is, because there might be events in the market or downturns in economies where you don’t want to panic and make bad financial decisions. And the difference between good longterm returns is often poor human behavior in terms of transacting too often or panicking and hitting the sell button too early.

 

Pete:

So things like that and there’s tools to go through that. So you can go through risk profiling, but really just going in with eyes wide open to financial decisions to say, “Well, okay, am I going to be comfortable if this money that I’m putting into this investment, drops by 30, 40%? Because if it’s a growth asset, that’s a realistic possibility. It’s happened before. Could happen with shares, could happen with property, could happen if you bought a factory, or you might’ve bought a business or whatever that is, that’s sort of a growth vehicle for your wealth.

 

Pete:

It’s subject to volatility and that’s the risk and reward trade off. So you’re getting paid additional return above the crappy cash rate that we’ve got at the moment, because you’re taking on additional risk. So there’s no free lunch when it comes to finance, but you do want to try and make sure that you are taking the appropriate amount of risk. Because without taking any risk, you get no return.

 

Pete:

So it’s walking a bit of a tight rope and getting that balance right. And I think the more you can understand that and have a conversation with your trusted network or your advisors out there. And advisors don’t need to be a financial advisor, they might be a financially successful person that’s in your circle of friends. I think that’s really important.

 

Pete:

And then the other thing is knowing what you don’t know. I think in these low interest rate environment times, people get seduced into investments outside of their circle of competence and their understanding.

 

Zac:

Bitcoin a couple of years ago.

 

Pete:

Yeah, well even Bitcoin now. But also things like term deposits that pay five times more than what the big four banks term deposits are. It should ring alarm bells, but sometimes that lack of understanding and labels can be misinterpreted and those sort of things. So just make sure you know what you’re getting into, because if you don’t have that, you can’t really have confidence that the asset structure that you’ve got in place, can be called upon if you do get sort of something out of left field, that you need financial resources for. I think that’s it from my end.

 

Pete:

I’ve exhausted my kit bag. I’m running on empty first week back. So, but yeah, hopefully you’ve got something out of that today. And if you’ve got any other suggestions or any other tips that people could utilize or something that you’ve benefited from in a time where you’ve experienced a bit of uncertainty, send it through. Happy to hear from it.

 

Pete:

And if you have enjoyed the podcast, please do share it. Because the more people that are listening, the more people that can benefit. And also, it will improve the quality of the guests that we can get on the show. Not that Zac’s… well you’re not a guest anymore. You’re a co-host. So yeah, that’d be really good. And then we’ll see you back next week and we’re going to empty the mail bag. There’s been a fair few questions that came in over the break, which is good. So I think we’ve run out of time for today, so we’ll tackle a fair few of those next week as part of the show as well. So, we do appreciate you sending it through, we’re not ignoring them. So we will get to them. So we’ll see you all next week.

 

Zac:

Cheers.