A financial check-up for the new year

Not sure if you will have enough money to achieve your goals? Try using these unconventional tests.

Summary: To work out whether you have or will have enough money, try using some unconventional tests. Consider if you can afford your medical bills. Make sure you are not calculating wealth after huge borrowings. Ask if you can do what you want without stretching your finances. And put money aside for unforeseen events.

Key take-out: Someone who can pass these tests can be considered wealthy, regardless of their assets.

Key beneficiaries: General investors. Category: Economics and investment strategy.

We have Christmas and New Year ahead of us and it is a time when you reflect on just where you stand financially and what is ahead.

The big budget deficit, the fall in Australia’s export revenues and the Sydney siege make us all just that bit more uneasy. And so for my last commentary for 2014 let me borrow from the ideas of David and Libby Koch and talk about what real wealth is. It’s my lot to talk about finance but don’t forget that real wealth is about happiness and wellbeing for yourself and your family.

All of us as we begin saving for future expenditures, security and retirement, and then move into an age where we could retire and may still work, wonder if we have or will have enough money to achieve our goals. A great many people ask me: What do you need to retire on? I usually give a seven figure answer but in fact needs vary greatly depending on the lifestyle you want to lead. Globally many people have incomes and assets far below what we in Australia would regard as satisfactory and at this time of the year it is worth remembering that we are more fortunate than most people in the world. 

In terms of whether you have or will have enough money let me suggest using these unconventional tests. 

The first is: Can you afford your medical bills? I have always been a great fan of private health insurance and made sure that my children and other members of my family and I are medically insured. An important test of wealth is whether you can afford the medical costs that come through on a regular basis and when unforseen events occur. And you need also to be able to afford regular dental check-ups.

My old friend former NAB CEO Nobby Clark is fond of reminding people of “the high cost of maintenance” which occurs when you reach your 80s. I have not reached my 80s but I can see what Nobby says is true.

The second wealth test is to make sure you are not calculating wealth after huge borrowings. Many entrepreneurs are fond of saying they are worth large sums but very often those large sums are subject to even larger amounts of debt. 

Debt can be important as you build up your assets, but, particularly when you are older, thinking you are very rich when you still have large amounts of debt can be a fallacy. Eureka Report asked me to talk about books I read this year (see Our top investment books, December 22). As I watched the thundering towers going up in Sydney and Melbourne I looked on my shelves and found a copy of The Land Boomers which describes the incredible boom in Melbourne in the 1890s which was all based on debt and crashed badly. To the extent that our building boom is based on Asian savings we have to hope it is not based on borrowed funds – as occurred locally in the 1890s. Having a debt-free dwelling also gives a great feeling of wellbeing.

Of course in your younger years monetary strategies are all about building wealth. But as you get older and particularly after you stop working, being able to live on the income from your investments is very important in assessing actual wealth. With lower interest rates, living on investment income is becoming harder to do and is forcing more and more people to increase their exposure to equities via banks and Telstra to gain higher yields.

I think at some point in today’s low inflation/ interest rate world, as you get older you may need to use some of your principal rather than risk the loss on being over-extended in equity. For some that has meant taking out some form of loan/equity arrangement in your dwelling. I am wary of those arrangements because your accommodation needs can change but I recognise that living in poverty in a million dollar plus home makes no sense. Nevertheless in assessing the underlying strength of your wealth, the ability to live on your investments is really important.

And, within reason, in assessing whether you have enough money or not, ask the question: “When I wake up in the morning can I do what I want to do?” If you can, and it doesn’t stretch your finances, that is a sign that you are in a strong financial position. Increasingly, and unfortunately, parents are forced to assist their children and later their grandchildren with education and other needs and so in determining your wealth you must ask whether you have sufficient money to give support to your children or grandchildren should you want to do that.

And finally have money for unforeseen events because they will happen. If you can pass all of those tests then you have sufficient money. Clearly if James Packer went through those tests would he need far more money to be declared wealthy because he has a higher spending rate compared to someone who has far less ambitions and aspirations.

I find that as I talk to people I discover that many are wealthy even though they have far less money than I have. They undertake similar tests to those I have discussed and apply them to the expenditure rates they are comfortable with. 

Finally as we look forward to 2015 a word about the wealth of the nation. Just as I talked about personal wealth in a different way let’s adopt the same approach to our nation. We desperately need a government that has a vision for the country. The Abbott government has certainly been able to lay out the problem but has not laid out the solution.

They will blame the Senate but the Senate would be much easier to manage if there was a clear set of strategies to manage the fall in commodity prices and the slump in mining investment. 

The only man in the government that has such a plan is Trade and Investment Minister Andrew Robb. The government is going to need his vision in 2015 or I suspect by 2016 there will be a change of government. The Robb plan for Australia’s future is linked to fostering small business and taking advantage of the trade deals he has done with Japan, South Korea and China.

And then there is also the vision for northern development given there is an Asian middle class that has spending power we have never seen before. Andrew Robb is one of the few people in the parliament that has a vision for the nation although that might be unfair. The good news is that there is a vision in the government for the nation, albeit hidden.