New Year Financial Health Check Considerations

Although 2024 is already a distant memory for most, it is never too late to undertake a financial health check.

As an Accountant and tax adviser, you play a crucial role in helping your clients maintain their financial well-being. Just as individuals get their car checked yearly or their physical health checked (hopefully) regularly, it’s equally important for them to set aside time for a financial health check. This ensures they are still on track for their financial future. Here are some key considerations to keep in mind when you or your clients are conducting a financial health check:

1. Do they have financial goals in place?

We all have goals we want to achieve, and it’s important to ensure that they are clear financial goals (for their business, or personal affairs). As a financial adviser, some goals we commonly see are:

• Self-funding retirement and ensuring that there is enough capital built up to sustain the lifestyle and standard of living desired
• Capital preservation and leaving a long-standing legacy, bearing in mind that the definition of ‘legacy’ may be vastly different amongst individuals (financial legacy for their family and/or community, contribution to society or the world, philanthropic endeavours, sustainable investing, just to name a few)
• Early inheritances for children through funding private education, or a contribution towards home purchases, without compromising their own financial goals
• The desire to explore and see what this world has to offer, by making provision for large, regular holidays
• Making sure their loved ones are financially secure in the event of death or disability, and ensuring that the wealth they have built, is passed onto their chosen beneficiaries in the most tax-effective manner possible

2. Evaluating personal circumstances

Reflect on any events or milestones that have occurred, as well as whether any goals have changed. Examples include:

• New working arrangements
• Significant pay rises or change in remuneration structure (eg. Changes from being employed to being paid dividends)
• Significant career changes or planning for a career break
• Purchase or sale of a family home/investment property (inside or outside of super)
• Repayment of home loan
• Marriage
• Children
• Divorce
• Death of a loved one
• Receiving an inheritance

How do they impact the longer-term plan? Do they still remain on track to meeting their goals?

3. Reviewing budget and cash flow

• How often is the personal budget and cash flow being reviewed; every year, or better yet, every month?
• Is there a cashflow surplus or a deficit? Are they happy with the net position?
• Is there an emergency fund that can be dipped into for unexpected expenses?

A great tip is to categorise expenses according to necessary and the discretionary, and ascertain whether there are items that can be reduced or eliminated. The key is to ensure:

• That there is full transparency over cash flow so it is clear exactly where, and how much is being spent in certain areas
• For discretionary expenses, ensuring that they are adding genuine value to their lives
• Understanding that a strong surplus cashflow position contributes immensely towards wealth accumulation objectives
• Enjoying the things that you value today, without necessarily compromising your future

4. Evaluating debt

• Have any debt been structured in the most effective way possible, and there is full awareness of the interest rates on this debt?
• Has the debt been categorised into efficient (debts such as home loans and investment loans), and inefficient debt (credit cards, personal loans, car loans).
• Is there clear understanding of how using debt can be a very useful tool for wealth building, and are the risks fully understood?

Focus on eliminating any inefficient debt as a priority, by doing this it will strengthen cashflow position, so there is more going towards wealth accumulation.

5. Ensuring the most valuable assets are covered

There is no point in having a plan in place, building up a stable financial future, only to have it deteriorate in an instant because the right protection and risk management plan has not been put in place.

As individuals, we are generally quite comfortable with protecting our physical assets such as our home, and our car, by having insurance in place. We tend to also be aware of how much cover is enough to cover for these assets.
However, is there also have cover for the really important assets in life, such as the family’s well-being and ability to generate income?

This is where personal insurance such as life, permanent disability (TPD), income protection, and trauma insurance becomes extremely valuable. By taking out an insurance policy, this is essentially paying for peace of mind that the most important assets are financially protected and taken care of if anything unexpected should happen to them.

For those who are unfamiliar with trauma cover, it’s designed to pay a lump sum if there is a major medical illness diagnosed, with the three most common being cancer, heart-related issues such as a heart attack, or stroke. This is very important as a means of providing funds to ensure that the best possible medical treatment can be afforded. For those of you who have minor children, they can also be covered under the same policy.

6. Review current financial planning strategy

Is the current structure and strategy that is in place, the most effective and appropriate for them to reach their goals?

Are the most effective vehicle/s being utilised, and has tax implications, cash flow issues, estate planning, accessibility and flexibility, been taken into consideration?

Three common strategies are maximising super, versus investing, versus paying down debt. Deciding which is best to achieve your goals is ultimately dependent on the personal circumstances of the individual.

7. Is the current investment strategy in line with risk profile, cash flow, and timeframe requirements?

Are they comfortable with their current investment strategy or is it time to review and consider the following:

• Whether the strategy is in line with risk tolerance, i.e. how much investment risk one is willing to take on in pursuit of longer-term investment objectives
• Whether it meets personal cash flow requirements, as well as investment timeframe
• A diversified strategy that is invested in a range of different asset classes to safeguard and reduce volatility
• Liquidity and the ability to sell assets should there be a requirement to access funds
• A balance between income-producing assets that meet income requirements, as well as sufficient exposure to growth-oriented assets that provide for longer-term growth
• Tax effectiveness of investments and understanding that there are certain investments that make more sense in certain vehicles/entity structures

8. Ensuring an estate plan is in place

This is imperative, but often the last thing we consider putting in place. What happens to the family and investments when they are no longer around? Are the investments, that have been built up to secure their financial future, being passed onto their desired loved ones and will it be passed on in the most tax effective manner?

Estate planning not only addresses what happens upon death but also covers who will make financial and lifestyle decisions if they can no longer do so, as well as who will be the guardians of any minor children.

We are all time poor, and therefore it is very easy for one’s financial world to be placed at the bottom of the list of priorities. This time of the year is a good time to you to have these conversations with your clients, to ensure that they remain on track for their financial future.

If you or your clients are unsure of where to start, or would like to undertake a complimentary review of their financial situation, then please feel free to contact one of Nexia Sydney’s Financial Advisers.