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Fundamental Financial Principles as taught by Parents
 Imagine you are a teenager again (or maybe you still are). You are out with your friends getting into mischief, egging each other on, doing increasingly crazy things, when all of a sudden there is an accident. Everyone in the group quickly sobers up and comes back to reality. You ask yourself, “What was I thinking?” You know that the laws of gravity can’t be changed, breaking the road rules can be very unforgiving, putting the wrong things down your throat will come back to bite you unexpectedly.
Once the dust settles, you go back to basics and try to better follow the rules your parents taught you.
When it comes to financial matters, there are fundamental principles that stand the test of time – they outlast the excesses of the day and probably are pretty close to what your parents told you, things like…….
Spend Less than you Earn
Easy to say, easy to agree with, but generally very difficult to do. If you haven’t read “The Richest Man in Babylon” by George S Clason then it would be worth an early visit to your nearest library.
A person’s financial well-being is more determined by the amount they spend than the amount they earn. High income earners seem to be able to get into financial trouble just as easily as the rest of us.
The best way to achieve this goal is to document your current cash flow position and then prepare a budget that is realistic yet limits your spending to the required level. There should also be an allowance made for savings (this may manifest itself as investing or reducing debt) so that your position is improving.
Use Debt Wisely
Debt can be a great friend and a vicious enemy. Many a corporate success has been built with the help of borrowed money, yet many of our big corporate failures have been compounded by borrowed money.
It is a common principle that one should avoid borrowing for consumables (clothes, holidays) or depreciating assets (cars, boats). Sometimes this cannot be avoided, for example if you need a car for work.
However, incurring debt to fund an appreciating asset is an accepted method of using the leverage that debt brings to acquire something that is not possible any other way, such as a house, investment or business. Of course the asset must be sound and long-lasting.
Once you have debt, there are a number of ways you can manage your affairs to meet your objectives, for instance debt consolidation and debt recycling.
Invest in Growth Assets
 Whether you have spare money or need to utilise debt, it is important to put this money to work. Aside from your own home, which is a non-income-producing asset, or a business, which requires active management, the best way to put money to work is to invest in growth assets.
A growth asset is one which provides a return, generally consisting of income and capital gains, in excess of inflation. Typically this would be property or shares, and can be structured either through direct ownership or via a pool or fund.
Growth assets take advantage of the principle of compounding to build value over time. Adding further contributions to the asset will promote growth at an accelerating rate. Dollar-cost averaging is one principle that is often used.
Protect Against Risk
Risk is a part of life. It is difficult to imagine any endeavour that is without risk. There is also risk attached to doing nothing. The real issue is to limit the amount of risk to what is acceptable, keeping in mind all the factors that affect the level of risk and the associated cost.
For example, the risk of the bread-winner in a family becoming incapacitated should be protected against if the consequences of that event are severe enough to justify the cost of the risk reduction strategy.
The risks of putting your money under your mattress include potential theft and loss of buying power due to inflation.
The best course of action in risk management is to perform a regular stocktake on what risks you are exposed to, have an understanding of effect of these risks and your tolerance to an adverse result, and investigate ways these risks can be protected against.
Don’t Pay More Tax than Necessary
Tax minimisation is high on the list of priorities for many people, and has been ever since taxes were first imposed. Provided it is done legitimately, it is an accepted  practice and one that has spawned a whole industry of advisers, regulators and products.
Nevertheless, there are a number of mainstream tax-planning strategies available, such as superannuation contributions, salary sacrifice arrangements, negative gearing, debt recycling, imputation credits, to name a few.
Probably the most important factor of any tax-friendly arrangement is that it should be set up correctly from the start – it is much more difficult to fix after the event.
Without a plan you are unlikely to know where you are, how you are going and when you arrive. Goal-setting, planning, implementing, monitoring and revising are all steps in the process. Generally the approach will be an incremental one – everything you do is in line with achieving the goal and each step takes you a bit closer.
These fundamental financial principles will help you navigate the currents and tempests of life and will allow you to enjoy clear sailing.
If you haven't already, book a no-obligation consultation with an iPlan adviser today on 07 3371 4555 or email info@iplan.net.au
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Effective from 1 July 2008, the ETR is available to parents who receive Family Tax Benefit Part A to help with education costs for their children in primary and secondary school. It is to be claimed on your 2009 income tax return and provides a rebate of 50% of eligible education costs, up to a limit of $375 for primary schools students and $750 for secondary schools students.
